The following is the report by Ramesh Nair, COO – Business & International Director, JLL India
At the best of times, investing in commercial real estate requires forethought, research and planning. When tracking down the ideal commercial property for business operations or for investment, various factors such as soundness of location, the health of the local job market, current and future infrastructure initiatives in an area and migration patterns into a city play important roles. While the broad guidelines above hold true for any commercial property investment, prime commercial properties require even greater insight and investigation.
Obviously, investing in a commercial property in a prime location can have multiple benefits:
· It is easier to find tenants for properties in prime locations than in low-demand locations. Finding tenants quickly is important, since it plays a role in yield calculations. Leaving a commercial property vacant for extended periods will result in loss of income.
· Banks are more willing to give loans to commercial projects in prime locations, since there is very low likelihood of capital loss
· It is easier for employees to travel to work every day – a major factor, considering that employee retention ranks very high on employers’ list of priorities today
A prime office space purchased for self-use is arguably the soundest business decision any firm can make. Apart from the fact that such a property is extremely convenient to commute to, a commercial office in a prime location increases a firm’s visibility and reputation. It is a visible demonstration of your firm’s commercial worth to your clients, partners and other businesses. Also, the capital appreciation of a prime office property reflects very favourably on a company’s balance sheet.
Both in terms of business potential and returns on investment, the highest value lies in prime office spaces. Invariably, the ‘prime’ value in commercial real estate is vested in the location, which leads to the question – how does one define a ‘prime location’?
The factors that make a location prime are a function of its overall accessibility within the city, the quality of infrastructure that supports it, the saturation of high-profile companies represented there and the overall quality of buildings in the sub–market. To determine if a location is prime, investors need to examine the following parameters:
· Can the office property be reached easily via all modes of transport?
· Is the office property close to major commercial hubs?
· What is the demand-supply gap?
· What is the tenant profile of the location? Which industries prefer it and what are their growth potential?
· Does the location have good social infrastructure such as restaurants, malls, shopping centres etc.?
· Is the location well-planned (e.g. Bandra Kurla Complex in Mumbai or has it grown with increased requirements (e.g. Nariman Point, which was reclaimed from the sea?
· Are there a lot of commercial space transactions happening in this location?
· Do the buildings have a modern look and feel (e.g. glass façades)?
If the answers to most of these questions are positive, then the location is a prime one.
The next aspect to determine is whether the project and property meet ‘prime’ criteria, as well. There are over 30 important technical specifications that a commercial property must meet, and this needs to be verified by an expert. If the project is under construction, the buyer or investor must be fully updated on the construction risks, the developer’s track record, etc.
The project and property must also be assessed for:
a. Repositioning potential
b. Refinancing potential
c. Refurbishment potential.
Finally, prime locations and prime commercial properties in them naturally come with prime prices. Since returns on investment are important, one must determine whether the location will also offer good capital appreciation.
Regardless of whether the purpose of buying a commercial property is self-use or investment, using the services of a reputed real estate consultant is a key factor for success. Expert, research-driven advice can ensure that one is not buying into a property or location which has or will have major drawbacks high vacancies and result in low returns on investment.
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